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It's a new way of crowdfunding through blockchain. The company usually creates a new cryptocurrency and selling it to investors that are interested in the project and agree to the terms and white paper. White paper is a document where entrepreneurs highlights their solution to a problem, coin/token distribution, with addition to roadmap, some real world examples, team presentation and analysis. Typical investor can purchase their coins via another cryptocurrency. It is similar to an Initial Public Offering (IPO) for stocks. Many are crazy over ICOs as they represent a great way of identifying interesting projects.
Example of token distribution:
60% investors
20% research & development
15% future plans
5% reserve